How do your structure your Private Money Deals?

Question

Hello BP members!

I have been thinking about private money lenders as I know some folks who have money that they might want to make it work for them.  I am thinking about sending an email out to family and friends letting them know that my wife and are are getting into REI. Let them know to keep their eyes out for distressed properties and let them know we are looking for private money. That being said how do you structure your private money lender deals?

- If you were to ask your family and friends for loans would you have some kind of collateral? Do you use an unsecured promissory note so there is a written agreement? Does it depend on how much you borrow from them (or any lender)?

- If you find a private money lender who is willing to loan a large amount of a deal do you add them to the title as collateral to make sure they are covered if you don't pay? (Deed of trust?)

- Do you finance it with an APR and make monthly installments of interest only? Ex: 10k at 10% = 10%/12 = 0.0083%/month = $83/month of interest

- Is interest/principal structures more common? Like a typical mortgage. Ex: Borrow 50k for 10 years at 8%

- Does anyone do straight interest only loan where they promise for example 5% on lenders money with no monthly payments? Ex: You borrow 10,000 at 5%, when you are done with the project, could be in 2 months could be in 12 months the lender gets 10500 back?  ( I am assuming this is not too common since you are paying the full interest amount back no matter the timeline)

I apologize if I am not asking the correct questions but this has been on my mind for a while. I have a possible off market deal in the future and am thinking about asking folks for personal loans so I can keep my money in the bank.  Just wanted to see what others have come up with creatively with private money structures.

Thank you!

Kevin Moules · Answer

@Alina Trigub, thanks for the ideas on finding private lenders! The idea of building a relationship with a title company sounds great. There is one I used for my primary and many people use around here. I think I may reach out to them. And you are correct, I can't say I did not receive any responses :)

@Simcha Davidman, your first sentence gave me good laugh as I have had other posts with not may responses :) . Thanks for your input on points 1 and 2! I am actually meeting with an off market seller today on a property. Hopefully the negotiation goes smoothly but I am nervous about messing up. But if I do, I guess I need to take the approach that its all about learning. What I learn today I can use on the next one. So I am taking point 2 to heart. If I can purchase this property I will think about going to these people with the deal in hand and see If i can borrow their money instead of a hard money lender. Wish me luck!

Simcha Davidman · Answer

@Kevin Moules great attitude! There are only lessons and learning. Best of luck and keep us posted!

Simcha Davidman · Answer

I echo @Alina Trigub - there are no stupid questions! Or I might just be saying that because sometimes I don't get many responses to my questions, either :)

The (potential) beauty of private money is that it's whatever you work out with the lenders. Without meaning to offend, a lot of it might come down to how sophisticated they are.

Two approaches for where it seems like you are right now:

1) Go speak with these family and friends, tell them your plan, and get a sense of what they would want in return for lending you money. It may be a minimum percent (calculated and payable in a variety of ways) and you mentioned, a lien on the property, or even some of the equity/upside potential. In my limited experience, you are unlikely to get any real actionable information/commitments from this approach, but it will also put your RE investing on their radar.

2) You approach the same people with a deal already in hand (now this could be something you saw, you already made an offer, or you might even have an accepted offer and now are in the due diligence period). At that point, you essentially have the same conversation as above - either, what will it take to get your money, or this is what I'm offering you for your money. The more trusting and less sophisticated, the easier it may be - but that also means you have a huge moral responsibility toward these people.

As you do more research, and more importantly look at deals and have these conversations with your network, these things will get easier.

Don't take my word for it. Seriously, I'm in a very similar boat as yourself. But this is what I hear from people in the know :)

Alina Trigub · Answer

@Kevin Moules First of all, there're no stupid questions, rather stupid answers. Second, you can only say you got no response, if I weren't responded. So you do have one! Third, yes, ideally you need to put in skin in the game to bring up their confidence level in your deal.  In terms of local private lenders, you find them through local REI clubs, ask ask active investors, GC's. Also it's always good to establish relationships with a local Title company as they go through a lot of investors and could a good resource for you as well.

Best!

Kevin Moules · Answer

@Alina Trigub, thank you for your information! I guess I must have posted a dumb question since there have been no responses :). I am thinking I would want some skin in the game as well to make them feel more comfortable. Maybe borrow  80-90% of the amount needed and then I would put in the additional amount. You mentioned calling existing private local lenders. How does one know who a lender is in your area? BP marketplace?

Alina Trigub · Answer

@Kevin Moules As a general rule of thump, if you want to use private money in order to make the deal attractive, you should offer your lenders first position backed by a house. However, keep in mind a lot of banks are not going to like that. So what do you do: you ask your lenders for a loan large enough to cover the purchase and renovations. In terms of the structure, interests, points - it depends. It differs from market to market, it also depends on the duration of a project, your relationship with a person, and how much are you willing to pay. I'd encourage you to call the existing local private and HM lenders and ask about their terms to see how to structure your offerings to ensure your rates are compatible with your local market.

How do your structure your Private Money Deals?

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